Solana Beach Lawyer—Salary and Bonus Provisions in Employment Contracts

SALARY AND BONUS PROVISIONS ARE PROVIDED - by Blumberg

Obviously, the compensation that an executive will receive is important. To determine the salary range commensurate with the position, it is helpful to do some comparison shopping. Clearly, the type of organization (professional society, trade association, or charitable organization) will have some bearing on the compensation level of the position. Size of the membership, amount of the annual operating budget, the number of staff, and geographic location also weigh into the equation.

There are two schools of thought regarding the best way to handle salary increases in the contract. Some executives prefer to have the amount of the raise set out with specificity in the agreement, while others prefer to leave it open. Those who want a specific amount set forth in the contract say that they dislike having to negotiate raises each year, and prefer to do it once and be done with it. Those who like to leave it open say that an established raise will penalize them in the event that they have a spectacular year.

Perhaps the best way for those who want it all would be to negotiate contract language as follows: “The employer may increase but not decrease the base salary each year. The employee shall receive an increase in his base salary of at least 3 percent per year. This increase may exceed three percent if the employee’ performance merits an additional increase.”

Recent years have shown an increase in the number of contracts that contain bonus provisions. Bonus provisions have the dual benefit of allowing the executive to make more money in the event of good performance and also forcing the association leadership to focus on what they think is important in developing the bonus goals. Some agreements are very specific about the amount of money the executive can earn, others are vague.

There is no right way, and the way the bonus amounts are specified depends on the culture of the organization. The most important factors for association executives to consider in negotiating bonus provisions are as follows:

1. Bonus goals and objectives can be measured by objective rather than subjective criteria.

2. Review bonus criteria annually.

Here is an example of contract language regarding bonuses: “The officers shall meet with the employee within ninety (90) days from the execution of this agreement to establish the criteria for determining the bonus for the first year of employment under the terms of this agreement. Bonus criteria for subsequent years shall be determined within the first quarter of the year in accordance with policies established by the board.”

Incorporate retirement provisions

Most associations have requirements in their retirement plans that will not allow an employee to be fully vested until he or she is employed for a specified number of years, yet continuation of retirement benefits is very high on the priority list in the financial discussions about new employment. The way to resolve this problem is to negotiate an agreement whereby the association will pay the executive an agreed-upon percentage of base salary as a pension and gross up the payment to include any income tax needed to make the full contribution.

Also the agreement should state that the employer will ensure that the employee receives the full retirement payment in the event of termination before being fully vested: “The employer shall provide the employee with an annual pension contribution in an amount equal to 7 percent of his annual base salary. This contribution will be allocated to qualified and non-qualified retirement plans, (as described in ERISA and the Internal Revenue Code), to achieve the maximum income tax deferment permitted by law. In the event that there is an excess amount, which cannot be contributed to the tax deferred plans resulting in taxable income to the employee, the employer agrees to “gross up” the contribution amount to enable the employee to obtain the 7 percent retirement contribution without incurring additional tax expenditures. If the employee leaves the employment of the association for any reason, other than termination for cause, prior to becoming 100 percent vested in the association pension plan, the association shall pay the employee the difference between the benefit received from the plans, and the amount he would have received if he were 100 percent vested as of his first date of employment.”

Perquisites(“Perks”)

Perks such as automobile allowances, club dues, and spouse and family travel allowances used to be prominent in executive contracts. With the changes in the tax laws, which now require that the amounts received for most of these items be treated as ordinary income, executives today are foregoing many such perquisites and asking for pay increases or transportation and business allowances instead.

Finally, whether negotiating a new contract or renegotiating an existing contract, always sit down with yourself and think about what you want. Clearly, “getting it in writing” is the key to creating an employment contract that bene Perks such as automobile allowances, club dues, and spouse and family travel allowances used to be prominent in executive contracts. With the changes in the tax laws, which now require that the amounts received for most of these items be treated as ordinary income, executives today are foregoing many such perquisites and asking for pay increases or transportation and business allowances instead. fits an organization as well as its chief executive officer.

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